Does Big Mean Bad; D. Matthews

The EconomicPower of Corporations by Don Mathews Dortune magazine annually presents its r "Fortune 500" list of the 500 largest corporations. To some people, the Fortune 500 is a twisted tribute to the most greedy and baneful institution that capitalism of fers: the big corporation. Critics of capital ism and big corporations often assert that such companies have excessive economic power and use that power to exploit con sumers and workers. Of course, not everyone thinks big cor porations pose an economic menace, but it is striking-at least to me-how many peo ple think large firms exploit consumers and workers to one degree or another. My wife and I once went to a dinner party at which the host and hostess, both nice people, spent half the evening talking about awful big corporations. The funny thing was that the food they prepared, the appliances they used to make the food, the plates on which they served the food, and the furni ture on which we sat to eat the food were all produced by big corporations. I don't think it's fitting to fuss at folks when I'm a guest in their home, so I didn't point out these facts. Later, with my belly full and dignity Professor Mathews teaches economics at Bruns wick College, Brunswick, Georgia.

intact, I drove home with my wife in our car that was built by, yes, a big corporation. Do big corporations exploit consumers? I reckon that "exploit" in this context means producing inferior goods and selling them at prices that yield enormous profits. Do big corporations produce poor products? Com pare the Quality and variety of goods and services available today with those on sale five, ten, or 20 years ago. Which would you prefer? The answer doesn't demand much thought. Of course, entrepreneurs are re sponsible for a great deal of innovation, but it takes only a casual shopping trip to see that big corporations have also brought a lot of new and better products to the market. Do companies charge prices that yield enormous profits? Before we look at the empirical data, we should note that it really does not make sense to use, as do many business critics, profit or profit margin as measures of the extent that corporations "exploit consumers." Exchange is volun tary in a free market. If a consumer pays a price for a good, and a corporation is not shielded by laws that restrict competition and does not misrepresent its product, then there is no reason to conclude that the corporation is exploiting the consumer sim ply because it earns a profit on the exchange.

(If profit is a measure of exploitation, are 77 78 THE FREEMAN. FEBRUARY 1996 corporations that lose money being ex ploited by consumers?) But assume that charging prices that yield enormous profits constitutes consumer ex ploitation. The Fortune 500 informs us that the firm with the most profit in 1994 was Ford, with $5.3billion in profits. That's a lot of money, but it came from revenues of $128.4 billion. Ford's profit amounted to only 4.1 percent of its revenues. General Motors, the largest corporation in 1994, earned $4.9 billion in profits-3.2 cents of each dollar of revenue. How about those big oil companies? Out of every dollar received by Exxon, the largest oil producer, 5 cents went to profit. Mobil, the next in size, kept only ·1.7 cents out of each dollar of revenue as profit. For the Fortune 500 companies in 1994, the median profit as a percentage of sales revenue was 4.6. The other 95.4 percent covered costs: wages and salaries of work ers, costs of other inputs, and taxes. The year 1994was no anomaly. Over the last ten years, median profit as a percentage of revenue for the largest 500 companies has ranged from 2.4 in 1992to 5.5 in 1988.Those numbers just don't seem to add up to cor porate exploitation of consumers.

What About Workers? Do firms exploit workers? Exploit here traditionally means that owners of capital stockholders-employ workers to produce goods but expropriate much of the income generated when the goods are sold, leaving little income for workers. Does the bulk of corporate income available for distribution go to owners of capital? In 1992, after-tax profits of all U.S. corporations totaled $249.1 billion. In the same year the com pensation of employees of U.S. corpora tions was $2,337.4billion. Workers received 90.4 percent of the total corporate income available for distribution. The 1992 income shares are not extraordinary: workers re ceived at least 90 percent of the corporate income available for distribution in every year between 1985 and 1992. In short, the bulk of corporate income goes to workers, not owners. The notion that corporations exploit con sumers and workers is part of the larger charge that big companies have excessive economic power. Do they? What would properly be considered "excessive"? True, in 1994the largest 500 corporations had $9.6 trillion in assets, $4.3 trillion in revenues, and $215 billion in profits, figures that are significantby any measure. But to conclude that economic power is therefore concen trated in big corporations is mistaken. Why?

Because individual firms act in their own interest, not the interests of bigcorporations as a group. Companies have disparate in terests, and they compete with each other. Consider the top three companies in the Fortune 500: GM, Ford, and Exxon. GM wants what is best for GM, not what is best for the Fortune 500. It would be best for GM if oil and gas prices were very low; GM's production costs would be less and its cars would be more attractive to consumers. But low oil and gas prices would not be in Exxon's interest. Exxon would prefer high oil and gas prices. GM and Exxon have conflicting interests, and what is good for one is not necessarily good for the other. Firm vs. Firm The divergence in interests between GM and Ford is even more. apparent: these corporations directly compete with each other. When GM expands its market share, it does so at the expense of its competitors, particularly Ford. GM would like nothing more than to develop cars that put its competitors' products to shame in the mar ketplace. Given the nature of the competi tion between GM and Ford, how can one conclude that there is excessive economic power in the auto industry simply because GM and Ford are the two largest U.S.

corporations? The rivalry between firms can be extraor dinary. The Wall Street Journal recently ran a story about how big oil corporations that's right, oil corporations-each spend millions of dollars testing the products of DOES BIG MEAN BAD? THE ECONOMIC POWER OF CORPORATIONS 79 their competitors to determine whether the claims made by competitors in their adver tising are accurate. When Chevron discov ered that Texaco was making a false state ment about its CleanSystem3 gasoline, Chevron made it public, and Texaco with drew its $40 million ad campaign. The point is not that large companies are pure, innocent babes in the economic woods. They are not. But the economic power of big corporations cannot be accu rately gauged without considering the gen erally fierce competition between firms. Businesses compete with each other for consumer dollars and skilled workers. A corporation cannot force customers to buy its product; when it attempts to "exploit"

consumers by bringing a shoddy product to the market at a high price, it soon loses customers to a competitor who offers a better deal. Nor can a company force people to work for it. When it attempts to "exploit" workers by paying them little, the workers leave for employers who pay workers more. Competition between corporations (and en trepreneurs) constrains the power firms have over consumers and workers by pun ishing businesses that exploit consumers and workers. Some critics of capitalism believe that being "big" makes a corporation impervi ous to market competition. But alongside the trail of American economic history you will find plenty of fallen corporate giants, emaciated or wasted entirely by market competition. Where are American Motors, Continental Bank, Eastern Airlines, and Kaiser Steel today? They don't exist. They were among the largest companies in the country not long ago. In his A History of American Business, C. Joseph Pusateri, presents the lists of the 25 largest U.S.

corporations in 1917, 1957, and 1986. If being "big" shielded firms from market competition, the three lists would be about the same. The 25 big corporations of 1917 could charge high prices for mediocre prod ucts without losing customers and revenues, pay poor wages without losing workers and increasing costs, ignore the marketing strat egies of their smaller competitors and the innovations of entrepreneurs, and grow and remain at the top of the economic pecking order year after year. But the lists are not the same. Of the 25 corporations in the 1917 list, 13 made it onto the 1957 list. Only seven-if we treat U.S. Steel and USX as the same firm-made it onto the 1986 list. Only 12 firms on the 1957 list made it to the 1986 list. Competition between corporations exists and is effective. At the top of the 1917 list is U.S. Steel. When formed through the merger of eight large steel firms in 1901, U.S. Steel became the world's largest private business: it had a total capitalization of $1.4 billion and ac counted for 65.7 percent of all steel sales in the United States. By 1917, U.S. Steel had assets valued at over $2.4 billion, more than four times the assets of Standard Oil of New Jersey (Exxon), the next largest corpora tion. But U.S. Steel's market share was down to 45 percent. Forty years later, U.S.

Steel was only the third largest company and its market share was less than 30 per cent. Today U.S. Steel is no longer U.S. Steel but USX, and has a market share in steel of less than ten percent, receives more revenue from petroleum than steel, and is number 121 in the list of the largest U.S. corporations, ranked by assets. The moral of the U.S. Steel story applies to all corpo rations: no firm is impervious to market competition. Those who worry about the economic power of big corporations would do well to think about how it was those corporations got big. GM and the other members of the Fortune 500 did not achieve their status by exploiting consumers and workers. In 1994, GM earned $155 billion in revenues and employed 692,800 workers. A corporation does not collect $155 billion in revenues by persistently ripping off consumers and does not retain 692,800 workers by abusing them. How powerful are big corporations? Not nearly so powerful as the competition that keeps them in check. D THEFREEMAN IDEASON LIBERTY Virtual Liberty by Matthew R. Estabrook F ree-market advocates often argue that individual liberty is necessary to ensure technological progress. Following the lead of such economists as F. A. Hayek, they contend that only a market system enables each of us to act on our own unique knowl edge and to seek and find new ways of meeting society's needs. The freedom to compete, succeed, and fail yields constant discovery, improvement, and progress.